Many small companies adopt the corporate form in order to shield their owners/shareholders/officers/employees from personal liability. It’s a well known risk management strategy for some individuals to avoid personal liability in certain situations.
For example, if the company performs unsatisfactory work, the wronged party may lack redress except when “extraordinary circumstances” allow that party to “pierce the corporate veil” and establish the corporation as the “alter ego” of the individuals. Absent alter ego, the company may simply default and its owner may start another business as a new limited liability company. This incorporate-default-repeat scenario may give unscrupulous entrepreneurs carte blanche to avoid responsibility for their misconduct so that wronged parties are never compensated for their damages.
Recognizing this injustice, the Court of Appeal in Michaelis v. Benavides (1998) 61 Cal.App.4th 681, refused to shield a corporate contractor’s president from personal liability after negligent construction of a driveway. In addition to allowing a breach of contract claim against the corporation, the Court of Appeal held that the president was personally, jointly and severally liable because he personally bid and negotiated the project, and oversaw its construction. As articulated by the court, corporate agents may incur personal liability when they participate in, direct, or authorize their company’s bad acts. This is due to the general agency rule that an agent is liable for his own conduct and may subject his principal to liability under the doctrine of “respondeat superior.”
The Michaelis case was decided in 1998. Yet, so many seem to be unaware of it or the general principles expounded in it and in similar cases. Consequently, too many companies and their lawyers underestimate the risk in certain circumstances.
Recently, we represented a plaintiff in a trial wherein the court found the corporate defendant’s president directly liable under Michaelis, to the tune of over $400,000. Suffice it to say, he would have been well-advised to have managed his risk better.